Reviving Manufacturing, Saving Energy: Can We Do Both?

A lot fewer Americans work in factories these days, and that has a major impact on energy intensity. Graphic: Census Bureau

Sometimes the long term trends are the hardest to see, yet also the most significant.

Take energy efficiency, for example. There’s no question that using energy more efficiently is crucial in both meeting the rising global demand and in minimizing climate change. And the good news is that the United States has been on a long trend of becoming more efficient. One of the best measures is “energy intensity,” or the amount of energy needed to produce one dollar of goods and services. As you can see in this chart from the Energy Information Administration, the amount of energy needed to produce a dollar of goods and services has been on a long steady decline since the 1970s.

The long, steady improvement in U.S. energy intensity is expected to continue. Graphic: EIA

On average, American energy intensity has been improving by 2 percent a year for four decades, and it’s projected to continue on that path through 2040. In fact the government’s projections show efficiency improving in every sector: residential, commercial, industrial and transportation.

There are a lot of reasons for that trend: government policy promoting more efficient appliances and cars, greater social awareness, and (sometimes) higher energy prices. It’s no surprise that energy efficiency should improve when prices are high, such as after the OPEC oil embargo of the 1970s or the gasoline price spike in 2008. It’s even more encouraging that the trend continued during periods when energy was relatively cheap.

But the energy we use reflects the overall nature of our economy. After all, energy use goes up during prosperous times and down during recessions, for the very logical reason that during a boom people are making and buying more goods, and during a recession they cut back. And one factor driving the shift in efficiency is a broader shift in the economy.

Over the last half-century, America has shifted from a manufacturing economy to a service economy, and that has had a significant impact on our energy use. The White House’s annual Economic Report of the President, released last week, made this point in the section on energy policy and climate change:

One reason for the decline in the energy intensity of the U.S. economy is the increasing importance of services as a share of U.S. GDP. Manufacturing is more energy-intensive than is the production of services, and for decades the share of U.S. GDP derived from services has been growing while the share derived from manufacturing has been declining. This shift from manufacturing to services therefore has reduced the energy intensity of the U.S. economy.

Or consider this chart from the Census Bureau, outlining ways America has changed since the 1940 census. In 1940, nearly one-quarter of the American workforce was in manufacturing. By 2010, that was down to one in 10. Some 23 percent of Americans now work in “educational services, health care and social assistance,” and it’s easy to see how that affects energy use. Factories use more energy than schools.

Other industrial nations do better on energy intensity. Graphic: White House

But while the shift in the economy is a major reason for gains in efficiency, it’s also kind of a cop-out. This shift from manufacturing to services has occurred all over the Western world. As the White House report points out, Germany and Japan have even larger manufacturing sectors than we do – and yet their energy efficiency is even better than ours. Why? They’ve got smaller homes, more efficient cars, and overall more aggressive government policies to promote efficiency.

Scott, as you note the U.S. economy has been shifting from manufacturing of goods to providing services since World War II. This has been due to number of social-economic reasons besides just shifting from manufacturing to non-manufacturing. For a couple decades we have witnessed the export of manufacturing jobs to overseas developing countries and increased trade deficits. As I’m sure you are aware this transition of durable goods manufacture to off shore is due to cheaper foreign labor & materials costs, and less government regulatory oversight costs (environmental controls, safety, taxes, etc.).

Japan and Germany have less energy intensive economies due to other reasons than just smaller homes, smaller-more efficient cars, and other government energy efficiency policies. Their average energy costs for motor & heating fuels and electric power are double the U.S. These countries also have higher population densities (more residents per sq. mile) and their average societies-economies are much less mobile than the U.S. (fewer per capita vehicles and much fewer annual vehicle miles driven).

For the Obama Administration to truly support the Manufacturing sector they need to make the current Regulatory Agencies’ oversights, administration and regulations much more efficient and they also need to substantially reduce future uncertainties of expanded-new regulations, increased taxes, etc. Expanding the Manufacturing sector based largely on Government subsidies and Federal customer base is also not likely to be reasonably sustainable or a sound policy. What do you think the odds are that the current Administration would even consider a less Government involvement or hands-off approach?